Weekend Strategy Review September 23, 2018

During the week, I spent a lot of time talking about the NASDAQ-100 or QQQ. I know a lot of you are watching the Dow continue to rise as the breadth on the NYSE continues to diverge and wondering how long this dangerous condition can continue.

During the week, I talked about how the Dow and NASDAQ are in different patterns. One index, the Dow, is in an Ending Diagonal that allows for a ‘through-over’ wave. As long as the VTI-volume indicator on the Dow remains positive, the ‘through-over’ wave can continue to push higher. On the other hand, the final through-over wave can end at any time, and because this wave is so unpredictable, we need to look elsewhere to tell us what’s really happening with this market. That’s why this weekend I want to take a closer look at the QQQ.

The attached chart of the QQQ pretty much tells it all. As you can see, one of the reasons the 30 stocks in the Dow have been rising, is because money…big money, has been pouring out of technology stocks and into the ‘defensive’ issues in the Dow. We know this is happening because the Strong Sector List has been dominated by these ‘defensive’ issues for the past few months.

Going into 30 August, large cap technology stocks and small cap issues on the Russell 2K had been the leading the market higher. But after 30 August, things started to change. Traders started to rotate out of the riskier technology stocks into the more ‘defensive’ issues in the Dow.

The initial decline into the 7 September low may have been sub-wave 1 down of Wave 1 down within a new Bear Market. We don’t know that yet, but if you look at the attached chart, you can see that since 7 September, the Q’s have formed an A-B-C retracement pattern that is likely sub-wave 2 up. Students should also note the Engulfing Candlestick Pattern that formed on Friday. This is a very bearish candlestick that usually forms at the end of a move.

So, IF the NASDAQ starts to move lower early next week, the key levels to watch are the two purple support lines. Forget about the Dow for now. Watch the NASDAQ. IF the Q’s start to break below the 180.5 level, it’s likely the Dow will follow. Remember, several of the large cap technology stocks, like Apple (AAPL), Microsoft (MSFT), Cisco (CSCO) and Intel (INTC) are currently traded on both indexes. So, IF the NASDAQ starts to decline, it will likely put pressure on the Dow.

The other thing to realize is that the rest of the world is under pressure too. I’m still on long-term Sell Signals for most of Europe, Canada, Australia, China and just about all the Emerging Markets, including Brazil, and Turkey. So, the question you need to ask yourself this weekend is can the U.S. markets continue to rally when the rest of the world is starting to tank? Hmmm? I don’t think so.

So, watch the Q’s early next week. If they start to break below 180.5, it likely means that sub-wave 3 down of Wave 1 down is starting. The initial downside target I’m using for the Q’s is the 167 level. If this target is hit, 153 becomes in play. Then IF 153 is broken, the next target is where Wave 5 up began, which is the November 2016 election level of 113. It’s not a pretty picture. Students should realize that IF the 180.5 level is broken, the targets mentioned become a real possibility, with increasing odds.

Again, last week I told to be careful with your stock selection and pay attention to the indicators. I said the Dow would likely push higher toward 26,600+. On Friday, the Dow was up 87 points, closing at 26,744. It reached an intraday high of 26,769. So now the Dow is in the + level of my estimated target. Hmmm? BTW, the Dow is now up 798 points since my VTI-volume indicator gave its Buy Signal. It pay$ to pay attention to the signals!

One other thing. Last week, I also told you there was a real and present danger that once the top in the Dow was reached, the Ending Diagonal Pattern suggests it will fall below the 24,000 level. I’m still sticking with this estimate…if the indicators turn negative.

Again, be careful. Watch the 180.5 level on the Q’s and watch the VTI-volume indicator on the Dow. This is NOT the time to be aggressive on the long side.

BTW, IF the Q’s break below 180.5, I’ll look to add to my short position in SQQQ.

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.